When it comes to U.S. oil exports, politicians are doing what they do best – playing catch, with nobody actually making a decision.
As you may know, there’s currently a ban on exporting the black stuff out of the United States. And while Congress dithers over its next move, the oil industry isn’t just sitting idly by. It realizes that it may take years before the ban gets lifted, so in the meantime, it’s busy working on an at least partial solution to the problem.
The key word: condensate.
You see, it’s not just crude oil that’s banned from being exported. Another kind of oil, called condensate, was also barred until just a few days ago after a decision by the Obama Administration.
What the heck is condensate?
Basically, it’s a super-light oil that’s historically been an obscure backwater product of the oil industry.
And production is booming…
The Condensate Solution
In the past, condensate was usually just blended into crude – but the shale boom has changed all that, as condensate production has surged. Indeed, condensate output more than doubled from 500 million barrels per day (bpd) in 2011 to over 1,000 million bpd last year.
And condensate production – mainly from the Eagle Ford Shale in Texas – is expected to grow by another 600 million bpd over the next five years. In fact, according to the U.S. Energy Information Administration, about half of the oil at Eagle Ford is actually condensate.
In fact, production is so high that there are very real fears of a glut and price crash.
Even the recent move by the Obama Administration is unlikely to alleviate the glut. Especially since Congress is already up in arms about the export of a small amount of condensate.
The industry’s solution?
To build a number of very low-end refineries, called splitters. They’ll turn the condensate into useful petrochemical feedstock products that are allowed to be exported.
It gets better, too…
The splitter facilities currently on the drawing board will cost around $1 billion. That pales in comparison to the many billions of dollars it costs to build a conventional oil refinery.
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They’re needed, too, since most Gulf Coast refineries are set up to process heavy crude oil and cannot process condensate.
While these splitters would only boast 450,000 bpd of refining capacity, because construction costs are so low, they’re economically viable. In fact, they should quickly become profitable, as they cheaply sop up excess condensate and turn it into products in demand from overseas buyers.
Condensate currently sells at about a $20-per-barrel discount to Light Louisiana Sweet crude oil. The discount may narrow a bit with the export of some condensate, but it won’t disappear.
Companies Building Splitters
As of May, eight companies had announced plans to build splitter facilities on the Gulf Coast.
Two of the eight are:
- Kinder Morgan (KMI), which is constructing a $360-million, 100,000-bpd facility near the Houston Ship Channel. It will be used by BP (BP) when it opens in November.
- Magellan Midstream Partners (MMP) will build a $250-million, 50,000-bpd splitter at its terminal in Corpus Christi, Texas. It’s backed by oil trader, Trafigura AG, with the facility opening in the second half of 2016.
As Congress continues to dawdle with regard to U.S. oil exports, these companies should benefit.
And “the chase” continues,